Should Households Base Asset Decumulation Strategies on Required Minimum Distribution Tables?

Abstract

Households managing wealth decumulation in retirement must trade off the risk of outliving their wealth against the cost of unnecessarily restricting their consumption. Devising an optimal decumulation plan, reflecting uncertain mortality and asset returns, is well beyond the abilities of most households, who likely rely on rules of thumb. Using numerical optimization, we compare one such rule of thumb – consuming the age-related percentage of remaining wealth specified in the IRS Required Minimum Distribution (RMD) tables – with alternatives and with the theoretical optimal. We show that in models that incorporate uncertain investment returns a decumulation strategy based on the RMD tables performs better than plausible alternatives, such as spending the interest and dividends, consuming a fixed 4 percent of initial wealth, or decumulating over the household’s life expectancy. The RMD tables generally result in too little wealth being consumed at younger ages, and are, therefore, relatively attractive to households with low inter-temporal elasticities of consumption. But all the above strategies fall well short of the theoretical optimum.